Defaulting on mortgage payments could prompt your lender to initiate a foreclosure proceeding against you. If you’re unable to get caught up on payments, that could result in the loss of the home. Before things get that far, however, your lender might offer some loss mitigation options to head off the foreclosure. There are different strategies for loss mitigation mortgage lenders may pursue, including forbearance, a deed-in-lieu or a short sale.
If you’re interested in buying a home, a financial advisor could help you create a financial plan for your needs and goals.
What Is Loss Mitigation?
Loss mitigation refers to a set of options that lenders may offer to borrowers in order to avoid a foreclosure proceeding. Foreclosure can be damaging to consumer credit scores and cost you your home but it’s also problematic for lenders. The various costs associated with foreclosing on a property can eat into profit margins. Not to mention, the lender now has to try to sell the home as quickly as possible.
Through loss mitigation mortgage lenders or servicers can help borrowers find solutions that can either keep them in the home or get out of the mortgage without having to resort to foreclosure. Federal mortgage servicing laws require that in most cases, loan servicers must begin loss mitigation once a borrower is 45 days delinquent on their payments. Borrowers must be notified of their options in writing or by phone.
Even if you’re not at the 45-day mark yet, you can reach out to your mortgage lender or loan servicer to ask about help with loss mitigation if you’re having trouble affording your mortgage payments. The sooner you connect with your lender, the more options you may have for avoiding foreclosure.
How Does Mortgage Loss Mitigation Work?
When someone falls behind on their mortgage payments, their lender or mortgage servicer will assign either an individual or group of individuals to help them through the loss mitigation process. Again, if you’re the borrower then the lender or loan servicer should give you notice that this has been done so you can stay in contact with the person or team assigned to your case.
Your loss mitigation specialist or team has several duties, including:
Explaining what loss mitigation options may be available to you
Guiding you through the process of applying for loss mitigation if a formal application is needed
Keeping you up-to-date on the status of your application
Helping you to submit an appeal if your application for loss mitigation is denied
Depending on the lender or loan servicer’s policy you may or may not need to submit documentation to apply for loss mitigation. If you do need to complete an application, the lender should send you the forms you need.
You’ll have to fill those out, providing information about yourself and your mortgage. You may also need to provide copies of your bank statements, recent pay stubs, tax forms and a financial statement or budget. In that sense, applying for loss mitigation is similar to applying for a mortgage.
If your inability to pay the mortgage is due to financial hardship, you may also be asked to provide a written explanation. For example, if you’ve fallen behind on mortgage payments because of a job loss you’ll need to detail when you lost your job and your efforts to find work since then. Or if you haven’t been able to pay because of an illness that’s kept you from working, you may need to provide a statement from your doctor attesting to that.
Loss Mitigation Mortgage Relief Options
Generally, loss mitigation is designed to help homeowners avoid foreclosure. The federal government recognized the need for loss mitigation strategies to avoid a repeat of the 2008 housing crisis. Together, the Treasury Department, the Federal Housing Finance Administration and the Department of Housing and Urban Development created a framework for loss mitigation that emphasizes:
Access to assistance for homeowners who need it
Payment relief to make mortgages more affordable
Long-term solutions to help avoid delinquency and default
Transparency at each stage of the process
Proper oversight of all parties involved
In terms of what loss mitigation options lenders or loan servicers can offer, there are several possible solutions available.
First, lenders might offer a forbearance period. Forbearance allows you to temporarily pause mortgage payments for a time until you’re able to resume making them. Any missed payments may be added on to the end of the loan term, which means you’ll be paying the mortgage longer. But forbearance can ease some of the financial pressure until you’re caught up.
Lenders may also allow you to add on missed payments to your current loan, without taking a forbearance on current payments. This can be structured as a deferral (also referred to as a partial claim) or a repayment plan. The difference between them lies in how they’re repaid.
With a deferral or partial claim, the lender gets repaid those missed mortgage payments when you sell the home or if you refinance the loan. With a repayment plan, missed payments are added to your current payments for a set time period. You don’t have to extend your loan term or pay anything out of your profits when you sell but you will temporarily increase your monthly mortgage payments.
Lenders may offer loan modifications in cases where the terms of your mortgage are not workable for your budget. Loan modifications allow for the restructuring of the loan so that you can get caught up on missed payments and potentially have a more affordable payment to make going forward. Keep in mind that if the loan term is extended you may have a lower payment but you’ll pay more for the home over the long term.
Short Sales and Deed-In-Lieu
In cases where the likelihood of foreclosure is high, the lender or loan servicer may suggest a short sale or deed-in-lieu of foreclosure if all other loss mitigation efforts fail. A short sale allows you to sell the home for less than what’s owed, with the agreement of the mortgage lender.
A short sale allows you to walk away from the home with less damage resulting to your credit score compared to a foreclosure. It’s important to note, however, that depending on where you live the lender may still hold you responsible for paying the difference between what the home sells for and what’s owed on the mortgage.
A deed-in-lieu of foreclosure essentially means you sign your ownership rights to the home over to the lender. You don’t have to go through foreclosure since you’re giving up your claim to the deed, but the lender does have to approve.
Deed-in-lieu can have a negative impact on your credit, though again, it’s generally not as bad as foreclosure or bankruptcy. And again, you should be aware that the lender may still require you to pay what’s owed on the mortgage. Talking to a mortgage expert or even your financial advisor can help you decide whether either of these options makes sense for your situation.
Loss mitigation can help you to stay in your home if you’re facing the prospect of foreclosure. Keeping the lines of communication between yourself and your lender or loan servicer open is often the best way to avoid a situation in which you risk the loss of your home.
Mortgage Planning Tips
Consider talking to your financial advisor about what loss mitigation mortgage options might be most appropriate if you’ve fallen behind on loan payments. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Refinancing your home loan could make mortgage payments more affordable if you’re able to qualify. When you refinance, you replace your current mortgage with a new mortgage. This could be a good option if you meet the lender’s credit and income requirements and have the potential to lower your interest rate or monthly mortgage payments. Using an online mortgage refinance calculator to run the numbers can help you decide if it’s an option worth pursuing.
Photo credit: ©iStock.com/AntonioGuillem, ©iStock.com/ArtistGNDphotography, ©iStock.com/PeopleImages